Suggestion 1 - adjust for the negative factor when estimating value using the income approach:

The most common method for estimating the value of a commercial property is the income approach. For details on how to use the income approach see the Commercial Property Appeal Guide.

The key steps are:

  • Research whether the market discounts similar properties for the negative factor and, if so, by how much.
  • If the market does discount properties, adjust the inputs in the income approach.

Example 1 – Poor public access:

The negative factor is poor public access to a commercial retail building. You could examine the rents obtained for similar properties with the same access issue. Are the rents for these similar properties less than the rent used to calculate your assessment using in the income approach? If so, you could argue that an adjustment should be made to reduce your assessment.

Example 2 – Flood hazard:

The negative factor is your property is at risk for floods. You could research the frequency of flooding and if similarly located properties are discounted. Evidence may be sales of properties on the flood plain compared to similar properties without flood danger. You could also look at the rents for properties with similar flood risk. Do they achieve lower rents than properties without flood risk?

If you find evidence, you could argue that you should receive a discount in the income approach either by reducing the rent income or increasing the capitalization rate for the higher risk.

Suggestion 2 - look for comparable sales:

If you are using the Direct Comparison Approach to estimate the value of your property, you could:

  • Review sales of properties that are similar to yours and use their sale prices to estimate the market value of your property (without considering the negative factor).
  • Estimate how much the negative factor reduces your property value.
    • You can ask an appraiser or real estate agent to give their opinion (preferably in writing).
    • Find another way to quantify the negative factor (such as capitalizing the reduction in rent or the increased costs related to the negative factor)
  • Subtract the reduction for the negative factor from your estimated market value. This is your estimate of the adjusted market value.
  • Compare your assessment to your estimate of the adjusted market value:
  • If they are close, then your assessment is probably correct.
  • If your assessment is much higher than the estimate, your assessment may be wrong.

Note:
You do not need to adjust the sales values if:

  • the sales have the same negative factor as your property, and
  • the buyers were aware of the negative factor.

The negative factor should already be considered in the negotiated sale prices.